10-Q 1 c69574e10-q.txt FORM 10-Q FOR QUARTER ENDING MARCH 31, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to ------------------------------ ------------------------------ Commission File Number: 0-18933 ROCHESTER MEDICAL CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-1613227 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE ROCHESTER MEDICAL DRIVE, STEWARTVILLE, MN 55976 (Address of principal executive offices) (Zip Code) (507) 533-9600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 5,328,500 Common Shares as of May 7, 2002. TABLE OF CONTENTS ROCHESTER MEDICAL CORPORATION REPORT ON FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheets -- March 31, 2002 and September 30, 2001.................... 3 Statements of Operations -- Three months ended March 31, 2002 and 2001; Six months ended March 31, 2002 and 2001 ................................ 4 Statements of Cash Flows -- Six months ended March 31, 2002 and 2001 ...... 5 Notes to Financial Statements ............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 11 PART II. OTHER INFORMATION ................................................ 11
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) ROCHESTER MEDICAL CORPORATION BALANCE SHEETS
MARCH 31, SEPTEMBER 30, 2002 2001 ------------ ------------ ASSETS CURRENT ASSETS: Cash and Cash Equivalents ............................ $ 534,298 $ 1,842,796 Marketable Securities ................................ 3,980,204 3,904,840 Accounts Receivable .................................. 1,333,927 1,499,337 Inventories .......................................... 2,987,834 2,099,226 Prepaid Expenses and Other Assets .................... 299,707 177,105 ------------ ------------ TOTAL CURRENT ASSETS ........................... 9,135,970 9,523,304 PROPERTY AND EQUIPMENT Land and Buildings ................................... 5,454,537 5,454,537 Equipment and Fixtures ............................... 10,301,909 10,175,200 ------------ ------------ 15,756,446 15,629,737 Less: Accumulated Depreciation ....................... (6,298,443) (5,682,089) ------------ ------------ TOTAL PROPERTY AND EQUIPMENT ................... 9,458,003 9,947,648 INTANGIBLE ASSETS Patents, Less Accumulated Amortization ............... 193,244 188,345 ------------ ------------ TOTAL ASSETS ............................................ $ 18,787,217 $ 19,659,297 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable ..................................... $ 387,815 $ 383,145 Accrued Expenses ..................................... 731,904 820,967 Short-term Debt ...................................... 200,000 -- ------------ ------------ TOTAL CURRENT LIABILITIES ...................... 1,319,719 1,204,112 SHAREHOLDERS' EQUITY Common Stock, no par value: Authorized -- 20,000,000 Issued and Outstanding Shares -- 5,328,500 .. 41,249,003 41,249,003 Accumulated Deficit .................................. (23,728,178) (22,660,988) Unrealized loss on available-for-sale securities ..... (53,327) (132,830) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY ..................... 17,467,498 18,455,185 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ................ $ 18,787,217 $ 19,659,297 ============ ============
Note -- The Balance Sheet at September 30, 2001 was derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See Notes to Financial Statements 3 ROCHESTER MEDICAL CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, ----------------------------- ----------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- NET SALES ......................... $ 2,553,431 $ 2,103,056 $ 4,879,863 $ 3,958,272 COST OF SALES ..................... 1,900,925 1,599,2277 3,651,983 2,891,098 ----------- ----------- ----------- ----------- GROSS PROFIT ...................... 652,506 503,8299 1,227,880 1,067,174 COSTS AND EXPENSES: Marketing and Selling .......... 481,609 567,728 1,017,663 1,358,295 Research and Development ....... 243,064 274,953 433,559 529,980 General and Administrative ..... 501,955 417,370 953,253 893,109 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 1,226,628 1,260,051 2,404,475 2,781,384 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS .............. (574,122) (756,222) (1,176,595) (1,714,210) OTHER INCOME: Interest Income ................ 51,345 104,658 109,406 230,052 ----------- ----------- ----------- ----------- NET LOSS .......................... $ (522,777) $ (651,564) (1,067,189) $(1,484,158) =========== =========== =========== =========== NET LOSS PER COMMON SHARE (Basic and Diluted) ............... $ (0.10) $ (0.12) $ (0.20) $ (0.28) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,328,500 5,338,900 5,328,500 5,338,900 =========== =========== =========== ===========
See Notes to Financial Statements 4 ROCHESTER MEDICAL CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, ----------------------------- 2002 2001 ----------- ----------- OPERATING ACTIVITIES Net Loss ............................................................... $(1,067,189) $(1,484,158) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .......................................... 636,955 686,806 Other non-cash compensation ............................................ -- 16,620 Changes in assets and liabilities: Accounts Receivable .................................................... 165,410 (402,837) Inventories ............................................................ (888,608) (3,892) Other Current Assets ................................................... (122,603) 3,137 Accounts Payable ....................................................... 4,668 (341,200) Other Current Liabilities .............................................. 110,937 (239,986) ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES ........................ (1,160,430) (1,765,510) INVESTING ACTIVITY Capital Expenditures ................................................... (126,708) (115,518) Patents ................................................................ (25,500) (28,654) Sales (Purchases) of Marketable Securities, Net ........................ 4,140 (350,149) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES .................................. (148,068) (494,321) FINANCING ACTIVITIES Proceeds from Sales (Purchases) of Common Stock ........................ -- -- ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES .................................. -- -- DECREASE IN CASH AND CASH EQUIVALENTS ......................................... (1,308,498) (2,259,831) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................................... 1,842,796 3,204,161 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 534,298 $ 944,330 =========== ===========
See Notes to Financial Statements 5 ROCHESTER MEDICAL CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2002 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the financial statements and related notes included in the Company's 2001 Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending September 30, 2002. NOTE B -- NET LOSS PER COMMON SHARE For the six-month periods ended March 31, 2002 and 2001, there is no difference between basic and diluted net loss per share. Common equivalent shares from stock options and convertible debt are excluded as their effects are antidilutive. NOTE C -- INVESTMENTS IN MARKETABLE SECURITIES As of March 31, 2002, the carrying value of the Company's marketable securities, which consisted primarily of corporate bonds and commercial paper, was $4.0 million. This total included a $1.0 million corporate bond from Pacific Gas & Electric ("PG&E") with a carrying value of $920,000 on March 31, 2002. This bond matured December 24, 2001, but has not yet been paid. On April 6, 2001, PG&E filed for Chapter 11 bankruptcy protection. While PG&E's management has stated their intent to pay their creditors, the numerous political and economic factors influencing the California utility market coupled with PG&E's bankruptcy filing could potentially impact the timing and/or actuality of payments. However, the Company currently believes that it will realize the full value of this investment. NOTE D - INVENTORIES Inventories consist of the following:
MARCH 31, SEPTEMBER 30, 2002 2001 ----------- ----------- Raw materials .......................... 578,943 $ 675,234 Work-in progress ....................... 1,463,287 892,736 Finished goods ......................... 1,045,604 631,256 Reserve for inventory obsolescence ..... (100,000) (100,000) ----------- ----------- $ 2,987,834 $ 2,099,226 =========== ===========
6 NOTE E - COMPREHENSIVE LOSS Comprehensive loss includes net loss and all other nonowner changes in shareholders' equity during a period. The comprehensive loss for the second quarter ended March 31, 2002 and 2001 consists of the following:
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2002 2001 2002 2001 --------- --------- ------------ ----------- Net loss .................................... $(522,777) $(651,564) $(1,067,189) $(1,484,158) Unrealized gain on securities held, net ..... 79,503 -- 181,288 -- --------- --------- ----------- ----------- $(443,274) $(651,564) $ (885,901) $(1,484,158) ========= ========= =========== ===========
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, certain items from the statements of operations of the Company expressed as a percentage of net sales.
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, ------------------ ------------------ 2002 2001 2002 2001 ------ ------ ------ ------ Total Net Sales ................ 100% 100% 100% 100% Cost of Sales .................. 74% 76% 75% 73% ---- ---- ---- ---- Gross Margin .............. 26% 24% 25% 27% Operating Expenses: Marketing and Selling ..... 18% 27% 21% 34% Research and Development .. 10% 13% 9% 13% General and Administrative 20% 20% 19% 23% ---- ---- ---- ---- Total Operating Expenses ....... 48% 60% 49% 70% Loss From Operations ........... (22%) (36%) (24%) (43%) Interest Income ................ 2% 5% 2% 6% ---- ---- ---- ---- Net Loss ....................... (20%) (31%) (22%) (37%) ==== ==== ==== ====
8 Three Month and Six Month Periods Ended March 31, 2002 and March 31, 2001 NET SALES. Net sales for the second quarter of fiscal 2002 increased 21% to $2,553,000 from $2,103,000 for the comparable quarter of last fiscal year. The sales increase primarily resulted from an increase in domestic branded sales, domestic sales to private label customers and international branded sales, offset by slightly lower international sales to private label customers. Net sales for the six months ended March 31, 2002 increased 23% to $4,880,000 from $3,958,000 for the comparable six-month period of last fiscal year. The six month sales increase resulted from an increase in sales in each of the Company's primary distribution channels, namely sales of domestic and international branded products and sales to domestic and international private label customers. GROSS MARGIN. The Company's gross margin as a percentage of net sales for the second quarter of fiscal 2002 was 26% compared to 24% for the comparable quarter of last fiscal year. The current quarter's margin primarily reflects a lower ratio of fixed overhead costs to net sales in the second quarter of fiscal 2002, offset by some inefficiencies in production. The Company is focusing on improving these inefficiencies, particularly scrap and productivity, as the Company continues to increase production levels. The Company's gross margin, however, continues to be adversely affected by scale and excess capacity. The Company's gross margin as a percentage of net sales for the six months ended March 31, 2002 was 25% compared to 27% for the comparable six-month period of last fiscal year. Factors related to the six-month margin are generally consistent with those discussed above for the current quarter. MARKETING AND SELLING. Marketing and selling expense for the second quarter of fiscal 2002 decreased 15% to $482,000 from $568,000 for the comparable quarter of last fiscal year. The decrease in marketing and selling expense is primarily due to significant non-recurring costs associated with the FemSoft(R) Insert in the comparable quarter of the prior fiscal year. Marketing and selling expense for the six months ended March 31, 2002 decreased 25% to $1,018,000 from $1,358,000 for the comparable six-month period of last fiscal year. The decrease in marketing and selling expense is primarily due to reduced expenditures relating to the FemSoft Insert and to the Company's extended care sales and marketing activities. RESEARCH AND DEVELOPMENT. Research and development expense for the second quarter of fiscal 2002 decreased 12% to $243,000 from $275,000 for the comparable quarter of last fiscal year. The decrease in research and development expense is primarily related to decreased clinical costs. Research and development expense for the six months ended March 31, 2002 decreased 18% to $434,000 from $530,000 for the comparable six-month period of last fiscal year. Factors affecting the comparative six-month expense levels are generally consistent with those discussed above for the current quarter. GENERAL AND ADMINISTRATIVE. General and administrative expense for the second quarter of fiscal 2002 increased 20% to $502,000 from $417,000 for the comparable quarter of last fiscal year. The increase in general and administrative expense is primarily related to non-recurring costs associated with an arbitration proceeding and increased costs associated with being a public company, including increased Nasdaq filing fees. General and administrative expense for the six months ended March 31, 2002 increased to $953,000 from $893,000 for the comparable six-month period of last fiscal year. Factors affecting the 9 comparative six-month expense levels are generally consistent with those discussed above for the current quarter. INTEREST INCOME. Interest income for the second quarter of fiscal 2002 decreased 50% to $52,000 from $105,000 for the comparable quarter of last fiscal year. The decrease in interest income reflects the comparatively lower average level of invested cash balances in the current quarter due to the utilization of cash for operations, together with an overall lower interest rate on short-term investments. Interest income for the six months ended March 31, 2002 decreased 52% to $110,000 from $230,000 for the comparable six-month period of last fiscal year. The decrease reflects a comparatively lower average level of invested cash balances for the current year and an overall lower interest rate on short-term investments as discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and marketable securities were $4,515,000 at March 31, 2002 compared with $5,748,000 at September 30, 2001. The Company used a net $430,000 of cash from operating activities during the quarter, primarily reflecting the net loss before non-cash depreciation and non-cash compensation. During the fiscal quarter ended March 31, 2002, the Company entered into a $1,000,000 revolving line of credit with U.S. Bank National Association. As of March 31, 2002, the Company had $200,000 outstanding under this line of credit. During the six-month period ended March 31, 2002, the Company's working capital position, excluding cash and marketable securities, increased by a net $730,000. Accounts receivable balances decreased 11% or $165,000 primarily as a result of the timing of customer orders. Inventories increased 42% or $889,000, primarily as a result of the Company's strategic decision to increase its level of finished goods, in part in anticipation of future sales to Mentor, with minimum quantities of such sales becoming effective April 1, 2002. Other current assets increased 69% or $123,000 during the recent six-month period as a result of the timing of payment of prepaid expenses and the receipt of an interest receivable. Current liabilities increased 10% or $116,000 during the recent six-month period, primarily reflecting the timing of payments and the Company's borrowings under its revolving line of credit. Changes in other asset and liability balances during the recent six-month period related to timing of expense recognition. The Company believes that its capital resources on hand at March 31, 2002, together with revenues from sales, will be sufficient to satisfy its working capital requirements for the foreseeable future as described in the Liquidity and Capital Resources portion of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K (Part II, Item 6) for the fiscal year ended September 30, 2001. However, the Company may be required to seek additional funding sources, such as additional borrowings under the Company's revolving line of credit or equity or debt financings, to fund the Company's working capital requirements. If the Company decides to seek additional financing, there can be no assurance as to the outcome of such efforts, including whether financing will be available to the Company, or if available, whether it would be on terms favorable to the Company and its shareholders. Failure by the Company to secure additional financing could result in significant cash constraints and financial issues for the Company. 10 FORWARD-LOOKING STATEMENTS Statements other than historical information contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "believe," "may," "will," "expect," "anticipate," "predict," "intend," "designed," "estimate," "should" or "continue" or the negatives thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: the uncertainty of gaining private label distributors for the hydrophilic intermittent catheters, the Release-NF Foley catheters and the FemSoft Insert; the uncertainty of insurance coverage of the FemSoft Insert by additional insurers; the uncertainty of market acceptance of the Release NF Foley catheter, the FemSoft Insert and new products; the uncertainty that initial consumer interest in the FemSoft Insert may not result in significant sales of the product or continued sales of the product after trial; the results of product evaluations; the securing of Group Purchasing Organization contract participation; the timing of purchases by customers (particularly international customers); manufacturing capacities for both current products and new products; results of clinical tests; the timing of clinical preference testing and new product introductions; FDA review and response times; and other risk factors listed from time to time in the Company's SEC reports, including, without limitation, the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K (Part II, Item 6) for the year ended September 30, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments which would require disclosure under this item. However, as disclosed under Note C to the Company's financial statements that appears on page 6, the bankruptcy of PG&E could potentially impact the timing and/or actuality of payment of our $1.0 million PG&E corporate bond. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 2. CHANGES IN SECURITIES Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 2002 Annual Meeting of Shareholders of Rochester Medical Corporation was held on Thursday, January 24, 2002, at the Minneapolis Hilton and Towers Hotel in Minneapolis, Minnesota. 11 The holders of 5,246,796 shares of common stock, representing 98.47% of the 5,328,500 outstanding shares entitled to vote as of the record date, were represented at the meeting in person or by proxy. Management's entire slate of seven directors listed in the proxy statement was elected to serve until the next Annual Meeting of Shareholders by the following vote tallies:
For Authority Withheld Darnell L. Boehm 5,094,629 152,167 Anthony J. Conway 5,094,712 152,084 Peter R. Conway 5,095,712 151,084 Philip J. Conway 5,148,972 97,824 Richard D. Fryar 5,148,889 97,907 Roger W. Schnobrich 5,095,629 151,167 Benson Smith 5,041,634 205,162
The Company's shareholders ratified the selection of Ernst & Young LLP as the Company's independent auditors by the following vote tallies:
For Against Abstain 5,026,003 220,510 283
ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None. (b) Reports on Form 8-K: None. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROCHESTER MEDICAL CORPORATION Date: May 14, 2002 By: /s/ Anthony J. Conway ---------------------------------------- Anthony J. Conway President and Chief Executive Officer Date: May 14, 2002 By: /s/ David A. Jonas ---------------------------------------- David A. Jonas Chief Financial Officer and Treasurer 13